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19 Apr 2021
by Paul Tucker

Employee benefits: making the most of tax-efficient opportunities

The end of another tax year is a good time for reflection for both employers and employees in relation to their benefit packages. Employers may be wondering what employees want in the current climate. Employees are likely to be concerned about the amount of tax they are paying on their benefits and looking at ways to reduce their liability.

 

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Here, I consider the opportunities available to employees and employers to reduce their tax liability on some key employee benefits.

Renewal of a company car
There are a number of options to consider when it comes to providing a company car. However, electric cars are likely to be the most tax-efficient choice.

The starting company car tax percentage for an electric car for the 2021/22 tax year is 1%. Typically the percentage for petrol or diesel cars is now at least 20%. It is worth bearing mind that the percentage for an electric/hybrid car increases depending on the mileage range, up to 14% for a car with a range of less than 30 miles.

There has been a lot of controversy about emissions over the past few years, which has also impacted on the tax treatment of company cars. For example, did you know that HMRC’s specified percentage for cars registered post 5 April 2020 is different from those registered before? Helping employees calculate their potential tax bill will help them decide which car to choose. Lower list prices and emissions mean lower tax bills for employees and lower Class 1A National Insurance (NI) bills for employers.

Provision of private fuel
This is something that needs to be considered for both the 2020/21 tax year and future tax years.  Historically, the provision of private fuel was only tax efficient for employees who travelled significant private miles. In the tax year ended 5 April 2021, due to the restrictions on travel generally, it is likely that most employees will have travelled fewer miles than in the past (both on business and on private journeys).   

Consider the following example for the 2020/21 tax year:

List price

Emissions (%)

Car Benefit in kind value

Fuel benefit in kind

£20,000

25

£5,000

£6,125

 

Tax liability (40% employee)

£2,000

£2,450

 

NIC liability (employer)

£690

£845

Although employers and employees are probably familiar with the size of the benefit, despite the relatively low list price for the car, they may be surprised by the size of the fuel benefit and the tax liability.

If the fuel cost 15p per mile, the employee would need to travel more than 16,333 private miles before the cost of the private fuel is greater than the tax due on the benefit, and for many that is unlikely given the lockdown restrictions this year.
If an employee makes good (reimburses) their employer for the cost of their private miles travelled then the benefit will be reduced to zero. 

Any making good must be done by 6 July following the end of the tax year in question.

Utilising HMRC’s exemptions

Many employee benefits are exempt from tax and NI. HMRC’s Booklet 480 sets out a useful summary of all of the available exemptions in Chapter 5.

Below are three of the more commonly used employee benefits exemptions:

1. Working from home

A number of concessions relating to Covid are currently in place, including those in relation to Working From Home Allowances, recently extended to 2021/22. Employers may wish to review their current arrangements and consider whether they want to pay the allowance (of £6 per week) to employees. If they do not, they may wish to advise employees of the opportunity to claim tax relief.

2. HMRC’s trivial benefit exemption

Many employers have PAYE Settlement Agreements with HMRC to cover tax due on occasional benefits provided to employees, for example gifts. They should ensure they are aware of, and utilise, HMRC’s trivial benefit exemption. The keeping of records to justify the exemption is key and the provision of the benefit has to satisfy the following conditions to qualify for the exemption:

  • the cost of providing the benefit does not exceed £50 inclusive of VAT (or the average cost per employee if a benefit is provided to a group of employees and it is impracticable to work out the exact cost per person);
  • the benefit is not cash or a cash voucher;
  • the employee is not entitled to the benefit as part of their employment conditions; and
  • the employer does not provide the benefit in recognition of particular services provided by the employee, e.g. benefits provided in recognition of services provided, such as a ‘thank-you’ for good results in the year, will not qualify as a trivial benefit.

HMRC provide useful guidance and examples in their Employment Income Manual.

3. Medical check-ups

Unlike the provision of private medical insurance (which is a taxable benefit), HMRC has a specific exemption for costs incurred by an employer in providing health screening or a medical check-up for their employees. Given the current concern over health issues, employers may wish to consider providing this benefit.

Finally, a word of warning.  Employers who are considering (or are already using) salary sacrifice to fund the cost of benefits must check HMRC’s Optional Remuneration Arrangements legislation which removes tax breaks in most cases.  

The author is Paul Tucker, employment taxes senior manager at UNW LLP.